Negative interest rates could change the way we see mortgages

Australia could follow countries in Europe and elsewhere to introduce negative interest rates. And home loans will be affected.

Imagine taking out a home loan, and the bank pays you interest to borrow the money from them.

That’s some seriously crazy, brain-bending stuff.

And yet talk of negative interest rates for Aussie borrowers and savers has been bubbling recently, even though the Reserve Bank of Australia (RBA) says such a move would be highly unlikely.

Our official interest rate, set by the RBA, currently sits at 0.1 per cent so there’s not much wiggle room to go lower if it needs to give the economy another Covid-fighting shot in the arm.

The RBA uses interest rates as a lever to keep inflation under control – raising rates to slow down consumer spending and prices, or lowering rates to stimulate more spending and inflation by enabling home loans and other debts to be offered cheaply.

If the latest Covid-19 lockdowns hurt the economy badly and spur a wave of business failures and personal bankruptcies, it’s conceivable that the RBA could lower its official cash rate to zero or even into negative territory.

This could lead to borrowers having to pay a bank to have money in deposit accounts, and mortgages where banks pay the borrowers – a complete role reversal of from what has always been normal.

Mortgage costs would fall further if the Reserve Bank drops interest rates below zero.

I personally don’t think we’ll get that far, given how quickly we bounced back from the pandemic’s first and second waves, and how we’re motoring towards vaccination targets that will end lockdowns.

But some economists and analysts have warned it’s a big possibility, and negative interest rates are not unprecedented elsewhere in the world.

Borrowers in European countries such as Denmark and Switzerland have been getting paid interest to have mortgages for several years. They’re still paying off their home loan principal but get a small extra payment each month courtesy of the negative interest rate.

The big losers from negative rates are savers. And they’re not a happy crowd in Denmark where some savers are having to pay banks interest for holding deposits of about $20,000 or more. One wonders how many stashes of cash are buried in gardens or hidden under beds over there.

Deposit account rates in Japan and Switzerland are also in negative territory.

Savers and retirees in Australia have suffered for years with interest rates on their bank deposits that are already close to zero, and become negative when they pay income tax on their interest earned.

We’re still a while away from negative rates on mortgages in Australia, because the RBA would have to cut deeper into negative territory for it to flow through to borrowers.

Today the cash rate is 0.1 per cent but most people are paying 2 per cent or more in mortgage interest, because banks still need to make a profit.

But what we do look like having is lower rates for longer.

Before the latest round of Covid lockdowns, economists had expected interest rates to start rising at some point next year.

Now those forecasts are being pushed back beyond mid-2023.

Negative rates or not, it’s party time for borrowers for a few years yet.

Originally published as Negative interest rates could change the way we see mortgages